1. The Tools of The Fed
By: Ben Quick

2. The Four Tools of Monetary Policy
1. The Reserve Requirement
2. Open Market Operations
3. The Discount Rate
4. Interest on Reserves

3. The Reserve Requirement
The Fed can affect money supply by changing the reserve requirement
The Fed requires that member banks keep a certain percentage of their deposits in reserve
Every time a bank customer makes a deposit, the bank must set aside a portion of the deposit as reserves

4. Open Market Operations
The Fed, through the Federal Open Market Committee (FOMC), can affect the money supply by buying and selling government securities (open market operations)
If the Fed sells securities, then it removes money from circulation
If the Fed buys securities, then it puts more money into circulation

5. The Discount Rate
The Fed can affect the money supply by changing the discount rate – the interest rate the fed charges on loans to financial institutions
Raising the rate will decrease the money supply
Lowering the rate will increase the money supply

6. Interest on reserves
The Fed pays interest to banks on the amount they keep in reserve
This is to offset the opportunity cost of not being able to loan out the money held in reserve
By raising the interest on reserve, they make it more beneficial for banks to keep money on reserve in excess of the reserve reuirement

7. Questions?